Small business activity in the UK jumped for first time in six months during March, signalling a return to growth as COVID-19 restrictions eased at the end of the first quarter.
The latest figures from NatWest's UK Small Business Recovery PMI show this was the strongest growth recorded since November 2016.
The monthly All-Sector Small Business Activity Index monitors the progress and challenges faced by small enterprises in the manufacturing, construction and services sectors as the UK economy slowly restarts.
PMI improved from 46.7 in February to 55.8 in March, where a score above 50 is needed to indicate growth, compared with a low of 40.5 at the start of national lockdown in January.
It was at a record-low of 14.6 in April last year, when the country was in its first month of national lockdown.
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According to the survey the recovery was led by small construction firms, with output among companies rising at the fastest pace for nearly 20 years (June 2001).
Small service sector businesses recorded the steepest rate of activity growth for three years in March.
which survey respondents linked to a surge in forward bookings and improved confidence due to the government's roadmap out of COVID-19 restrictions on consumer-facing businesses.
NatWest (NWG.L) principal economist, Stephen Blackman, said: "Just as the service sector was the main casualty during the pandemic, so the largest sector of the UK economy should be the main beneficiary of the gradual reopening of the UK economy in coming months."
In manufacturing, the data showed that production continued to pick up from the slump seen at the start of the year.
The survey, which focuses on companies employing between one and 49 people, also indicated that small businesses in London and its surrounding regions (South East and East of England) recorded the strongest performance during the opening quarter of the year.
It was the only monitored area where small business activity rose on average.
"This reflected not only a strong upturn in output in March ahead of easing lockdown restrictions but also a relatively shallow downturn at the start of the year," the NatWest study said.
Employment levels in small businesses rose in March for the first time since the onset of the pandemic. The rate of job creation was the fastest since January 2020, reflecting extra hiring in all three sectors monitored by the survey.
However, higher demand put pressure on supply chains already struggling due to COVID disruptions and post-Brexit trade frictions.
Small manufacturers recorded the longest lengthening of supplier lead times since this index began in 1992. This led to intense inflationary pressures and placed extra strain on cash flow in March. Measured overall, small businesses recorded the steepest increase in input costs for a decade. Small manufacturers also saw falling overseas sales in each of the first three months of 2021.
In comparison, there was resilient export order growth at large firms. Manufacturers widely noted that new trading arrangements with EU clients had a severe impact on sales throughout the first quarter.
Andrew Harrison, head of business banking at NatWest, said: "These headline stats are a positive read as small business optimism for the year ahead hits an all-time high."
However, Harrison warned that there are "still challenges" for Britain's small businesses at a "sector and regional level."
He highlighted that supply chains for small manufacturers are "causing upward costs pressures" and that small business optimism is being led by London and its surrounding areas.
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Looking ahead, the strongest expectations for a recovery are also the highest in London and its surrounding regions.
This is closely followed by the North of England which also saw a trend in expanding workforce numbers. While, there are still some disparities across the regions, they have narrowed in recent months.
Meanwhile, small business confidence in Northern Ireland has started to close the gap with the rest of the UK after trailing far behind at the beginning of 2021.
The planned easing of pandemic restrictions provided a boost to business optimism towards the year ahead outlook in March.
Optimism among small firms was the strongest since this index began in July 2012, with growth expectations especially high in the construction sector amid a surge in demand for work on residential projects.
"Overall, the outlook for the UK economy is brightening and with the IMF recently upgrading its forecast for UK growth, this suggests lost output in the UK will be recovered sooner than previously expected, possibly in early 2022," Blackman added.